Key takeaways:
- In our view, markets have been anticipating some form of resolution to Middle East tensions, limiting the impact of the latest news.
- From an investment perspective, recent market moves appear driven by expectations of lower oil prices, easier policy, and increased liquidity, rather than a fundamental shift in the economic outlook.
- Maintaining discipline and diversification remains critical, as history suggests that reacting to short-term geopolitical developments is rarely a prudent investment strategy.
The latest developments in the Middle East are clearly very encouraging. However, from an investment perspective, we would caution against interpreting the news as a fundamental shift in the global economic outlook. We are not event-driven investors, instead focusing on fundamentals to make decisions on positioning, and history shows well that knee-jerk reactions to geopolitical news are rarely prudent.
That being said, here are some initial thoughts investors might find helpful in reaction to the latest developments.
Markets had already begun to price a resolution…
Markets have been anticipating some resolution to the Middle East war for some time. Oil markets, peaked at various points in April, with benchmarks across crude and refined products turning lower well before the latest news.
…with speculation and liquidity driving the initial reaction
The immediate reaction in the markets seems to be the outperformance of more speculative assets. The prevailing narrative is that falling oil prices will allow the US Federal Reserve (Fed) to avoid rate hikes, which in turn will spur more liquidity available for speculation. For example, cryptocurrencies have rallied sharply on the news, and the artificial intelligence (AI) trade appears to be in vogue.
However, this type of behaviour looks more like a continuation of speculative dynamics than a reassessment of underlying fundamentals. This is consistent with what we have highlighted more broadly. In our mid-year outlook, Multi-Asset: Boring is still beautiful for the second half of 2026, we argued that markets are exhibiting increasingly speculative characteristics, with investors equating financial markets with betting markets and favouring higher-risk positioning – which may not prove prudent in the second half of the year.
Inflation remains the key question
Market action will be critical to determining the medium- to longer-term implications for inflation. As we have emphasized for decades, bubbles are inherently inflationary because they grossly misallocate assets within the economy. Although the AI trade is exciting, large and important portions of the economy remain starved of capital. If those capital starved sectors remain unable to expand to meet demand, then upward pressure on inflation might remain.
Structural forces remain intact…
The longer-term inflationary forces of deglobalization remain in effect despite the welcome news in the Middle East. Even though this war might end up being a short event, it remains fairly clear that the global economy remains susceptible to supply chain shocks and trade barriers.
…and history suggests fundamentals dominate
Although politicians might disagree, the latest outline of the peace proposal seems similar to the 2015’s Joint Comprehensive Plan of Action (JCPOA). In the year after the JCPOA was signed, the best performing ACWI sectors were Utilities, Consumer Staples, Technology, Communication Services, and Industrials. In other words, the JCPOA took a back seat to economic fundamentals, and we expect the current situation will be similar.
It is good news that there could be a resolution to the war in the Middle East. However, rather than short-term news-driven trading, we continue to emphasize thoughtful consideration to fundamentals and an emphasis on diversification.
Important Information
Diversification neither assures a profit nor eliminates the risk of experiencing investment losses.
MSCI All Country World Index℠ (ACWI) reflects the equity market performance of global developed and emerging markets.
Deglobalisation: A long-term shift away from global trade integration toward more local or regional supply chains.
Inflation: The rate at which the prices of goods and services are rising in an economy. The consumer price index (CPI) and retail price index (RPI) are two common measures; the opposite of deflation.
Liquidity: Liquidity is a measure of how easily an asset can be bought or sold in the market. Assets that can be easily traded in the market in high volumes (without causing a major price move) are referred to as ‘liquid’.
Speculative assets: Investments that are driven more by sentiment and positioning than by underlying economic fundamentals.
These are the views of the author at the time of publication and may differ from the views of other individuals/teams at Janus Henderson Investors. References made to individual securities do not constitute a recommendation to buy, sell or hold any security, investment strategy or market sector, and should not be assumed to be profitable. Janus Henderson Investors, its affiliated advisor, or its employees, may have a position in the securities mentioned.
Past performance does not predict future returns. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested.
The information in this article does not qualify as an investment recommendation.
There is no guarantee that past trends will continue, or forecasts will be realised.
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